Recent commentary regarding amendments to the safe harbour provisions in the Corporations Act 2001 (Cth) is causing some confusion about when a party should appoint a voluntary administrator or liquidator.
The amendments are by virtue of the Coronavirus Economic Response Package Omnibus Act 2020 which was extended from 25 September to 31 December 2020 by the Corporations and Bankruptcy Legislation Amendment (Extending Temporary Relief for Financially Distressed Businesses and Individuals) Regulations 2020.
One view is that protection for company directors only applies if they commence an external administration prior to 31 December 2020, noting there is no retrospective protection measures if a company director enters external administration after 31 December 2020. However, another reading of the provision suggests that it might not be necessary to take action by this date.
Section588GAAA – Safe harbour—temporary relief in response to the coronavirus
Section 588GAAA(1) of the amending legislation reads:
(1)Subsection 588G(2) does not apply in relation to a person and a debt incurred by a company if the debt is incurred:
___(a) in the ordinary course of the company’s business; and
_________(i) the 6-month period starting on the day this section commences;
_________(ii) or any longer period that starts on the day this section _________commences and that is prescribed by the regulations for the _________purposes of this subparagraph; and
(c) before any appointment during that period of an administrator, or liquidator, of the company.
The issues concern the interpretation of section 1(c) and whether it requires an appointment of an administrator or liquidator before the end of the moratorium period, or whether the word ‘any’ simply truncates the time period. That is, if there were ‘any appointment during that period’–referring to the time period currently expiring on 31 December 2020–then only debts incurred before the appointment are protected.
The latter view accords with the underlying purpose and policy of this COVID safe harbour provision. Unfortunately, there is unlikely to be any judicial determination before the moratorium period expires. Accordingly, a number of bodies have been making representations seeking legislative clarification. In the meantime, practitioners need to be aware of the competing interpretations and take those into account when advising clients.
What does the Explanatory Memorandum say?
Paragraph [12.17] of the Explanatory Memorandum states in respect of subsection 1(c):
“the debt is incurred before any appointment of an administrator or liquidator of the company during the temporary safe harbour period.”
This does not resolve the ambiguity issue.
Paragraph [23.116] states:
“In particular, a director wishing to rely on the temporary safe harbour must point to or adduce some evidence that suggests a reasonable possibility that:
- the debt incurred was in the ordinary course of the company’s business;
- the debt was incurred during the six month period or longer period prescribed, beginning on the day the amendments commence; and
- no administrator or liquidator was appointed, within the six month period, before the debt was incurred.”
However, this paragraph also fails to definitively resolve the issue, because it states ‘no’ VA or liquidator is to have been appointed, compared with the final drafting, which arguably allows a VA or liquidator to be appointed, and only protects debts incurred before this time.
Members should be cautious in advising clients
Accordingly, unless and until the section 588GAAA(1) is amended, when advising directors relying on the section, practitioners should take account of the possibility that the protections will not apply to if the directors do not appoint an administrator or liquidator on or before 31 December 2020 (or such later period as might be prescribed).